TLT - The Critical Significance Of The March 14 CPI Report

2023-03-13 18:00:53 ET

Summary

• The U.S. Consumer Price Index will be published by the Bureau of Labor Statistics at 8:30 AM, Tuesday, March 14, 2023.
• Under current conditions of turmoil in the U.S. banking sector, higher-than-expected CPI figures could have severe impacts on markets.
• High CPI figures would place the Fed in an extreme predicament.

In this article, I will explain why the CPI report to be released at 8:30 AM ((EST)) on Tuesday, March 14, 2023, will be unusually significant.

In essence, the situation is as follows: under current conditions of distress in the U.S. banking system, if the CPI numbers come in higher than expected, the Fed would be placed in an extremely difficult predicament. Almost regardless of how the Fed decided to resolve that predicament, financial markets would experience severe adverse circumstances.

Expectations

The following are the median forecasts of a survey of economists for All-Items and core CPI, according to Investing.com:

Investors should pay particular attention to the number for CPI Services, Excluding Housing. This is the number being most closely watched by the Fed. The number last month was 0.36% MoM and 6.2% YoY. If the numbers this month are any higher than this, it would place the Fed in a particularly difficult position, as I explain in more detail below.

Significance

Tuesday’s CPI report has taken on a special significance in the aftermath of the recent severe stress that has recently been experienced in the US financial system, including the recent failures of Silvergate Capital ( SI ), Silicon Valley Bank ( SIVB ), and Signature Bank ( SBNY ) – plus the collapse in the stock prices of numerous other U.S. banks. This is because a CPI report with higher-than-expected figures could place the Fed between a rock and a very hard place.

• Rock. The “rock” I refer to above is destabilization of the financial system, which is likely to occur if, in response to high CPI numbers, the Fed raises interest rates. Normally a 25 or 50 basis point increase in the Fed Funds rate would not pose a threat to the financial system. However, in the current context of turmoil in the interbank funding markets and the overall banking system, such a rate hike could have devastating consequences.

• Hard place. The “hard place” I refer to above is failing to take decisive action to reign in high inflation, which would have the effect of placing in risk the Fed’s inflation-fighting credibility and thereby potentially cause an un-anchoring of longer-term inflation expectations.. Core CPI is currently significantly above the Fed’s target of 2.0%. Allowing inflation to remain stuck at this level or possibly even allowing it to accelerate would greatly erode the Fed’s inflation-fighting credibility. This would have severe and unpredictable consequences, including possible threats to the stability of the U.S. Dollar itself and U.S. dollar-denominated assets such as U.S. Treasury securities.

If the CPI report on Tuesday comes in hotter than expected, the Fed will be placed in the untenable position of having to choose between two evils:

Evil #1: On the one hand, if the Fed chose to raise interest rates in response to higher-than-expected inflation, markets would most likely experience severe declines in prices, as the current expectation that is priced into fixed income markets is that the Fed will be “on hold” in terms of further rate hikes for a significant period.

Evil #2: On the other hand, if the Fed chose not to respond to higher-than-expected inflation, then long-term inflation expectations that are embedded into all U.S. securities of intermediate-to-long duration (e.g. notes, bonds, preferred securities and equities) could rise significantly thereby significantly raising the long-term cost of funding and discount rates throughout the U.S. economy. Furthermore, the U.S. dollar and US dollar-denominated securities such as U.S. Treasury Notes would likely come under severe pressure in international markets.

Whichever of these two evils the Fed choses would have very deleterious impacts on the U.S. equity market. The former evil would be felt immediately. The latter evil would likely be experienced over the course of a longer period.

Conclusion

Higher-than-expected CPI numbers on Tuesday, March 14, 2023 would likely have a very severe negative impact on U.S. financial markets. Investors should, in particular, pay special attention to CPI services ex-housing. If the CPI numbers come in as expected, or below, the Fed and U.S. Treasury will enjoy some time while depositors can become assuaged of the situation, and for calm and order to be restored in the interbank markets and other markets (including bond and equity markets) that are closely connected to the U.S. banking system.

The stakes could scarcely be higher from a fundamental standpoint, as I have explained in this article. From a technical analysis standpoint, the U.S. equity market also happens to be at a major crossroads as I detailed in my article , “I Will Show You What Recent Market Action Fundamentally Means.” The critical horizontal support level to watch is around 3764 on the S&P 500 Index.

I will be providing a highly detailed analysis of the CPI report on Tuesday, March, 14, 2023. Click the “Follow” button below, if you would like to be alerted.

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